P&I: Tony, do you agree?
MR. THOMSON: Yes. But I would like to say first that I think the greatest danger to all this is some sort of external shock. My favorite would be something that upsets the relationship between the Japanese exporters of capital and the U.S. importers of capital. But what will happen in the
U.S. market is there will be a correction.
Having said that, everyone in London has been expecting a correction for several years. There ought to be one, and it probably will be triggered by interest rates and you might get sort of a diamond-shaped thing with rates going up and then coming off again and the market going down and then maybe recovering a bit, ending more or less where it is.
P&I: You do expect some sort of correction some time next year?
MR. THOMSON: Volatility is at an historic low, and unless the economic cycle has been suspended or has disappeared, one would expect it to occur.
P&I: I think people are beginning to believe it has been suspended. Allan, what are your thoughts?
MR. MCKENZIE: We also have been thinking the U.S. market has been overvalued for some considerable time. I think, as we go through the economic cycle, the 'e' of the p/e is going to come under a lot more pressure.
In the early stages of the economic cycle, it is easy to generate earnings and profits through restructuring and the U.S. is now, I would say, very lean and very mean. But the further one goes on in the economic cycle, earnings are going to be the pressure point.
We are concentrating more on large-capitalization stocks where we clearly can see visibility of earnings and we feel comfortable with the management, because the management has been through a downturn before rather than the more esoteric end of the market.
P&I: Nilly, your thoughts?
MS. SIKORSKY: I do not agree with the overvaluation of the American market. It seems to me the valuation is under previous peaks for most of the valuations you look at, and interest rates are much lower than previous peaks.
Really, the United States' position in the world has been transformed: it has lost its biggest enemy; it can concentrate its energy on product itself; it has an undervalued currency; it is becoming competitive; it is making more productivity improvements than the Japanese these days.
American companies are the leaders in the most dynamic industries in the world, in the most dynamic sectors, whether high-tech, or interactive television and so on. We have been quite high on the U.S. market and we are not terribly surprised.
Now, could there be a correction? Sure, I think there will be one because there is always a correction at some point. I suspect what could trigger it would be an enormous success of this inflation-linked bond the U.S. government is going to bring in in May, because the way it is constructed it seems so juicy for financial advisers in the United States to use it for the little old lady in Florida and so on. That could stop the inflow into equity for a while and then people can panic and you can have a correction.
P&I: Alan?
MR. MCFARLANE: I think the much more telling question is, relative to other markets, where do we see Wall Street? I think the key thing is that Wall Street is 44% of the FT Actuaries World Index and it is 43% of the Morgan Stanley World Index.
I think the case for putting 43% of one's money in a global portfolio into the States begins to weaken as you look at the value and growth opportunities elsewhere. That is how we look at it.
P&I: While we are talking about weightings, Tony, what are your weightings in U.S. stocks?
MR. THOMSON: Well, since most of our money is either U.K. pension funds, money management in Germany or investment trusts, we would be very underweighted, collectively.
P&I: Dean?
MR. BUCKLEY: We were neutral in U.S. equities at the start of the year. By March, the valuation models we used were very, very stretched indeed, and on top of that around March we were expecting to see U.S. interest rates confirmed. So, we went underweight in U.S. equities at that time. We have since sold U.S. equities two more times.
MR. THOMSON: I think there is a very big risk that Nilly is right. I mean, it may be like 1952. We may have a new outlook for the U.S. that is much more favorable than the rest of the world.
(contd)
